The chance mutation of mutuality

The evolution of building societies took an unexpected twist in August when a low-life grave dancer teamed up with the enfant terrible of the mutual lenders to create what might be a new template for the sector in the form of the Kent Reliance Industrial and Provident Society with a subsidiary bank as the conduit for lending.

A low-life grave dancer is how Chris Flowers of private equity firm JC Flowers once described himself and his partner in the new venture is Mike Lazenby, chief executive of KRBS who has never been quite so self-depreciating but who is regarded as something of a maverick by some of his peers.

The deal, made possible under the legislation that allowed Britannia Building Society to merge with Co-operative Financial Services, represents an innovative solution to a problem that has bedevilled building societies since the Financial Services Authority ruled that permanent interest bearing shares didn’t qualify as tier one capital.

As building societies capital is derived from profits accumulated over the years and profits have been badly hit in recent times, many have been forced to deleverage their balance sheets while others have had to merge with bigger brethren such as Skipton, Yorkshire, and Nationwide.

Now, thanks to a £50m investment by JC Flowers, Kent Reliance will see its tier one capital double. In return for its investment JC Flowers will receive a 49% stake in a new holding company under the management of the building society.

Declining to specifically comment on the deal, a spokeswoman told Lending Strategy that the sector was resilient and also innovative: “In the light of current extreme economic conditions, different societies will pursue their own individual strategies”, she said.